Health co-ops stumble with loans, Republicans say

(Bloomberg) — President Barack Obama’s use of federal loans to bankroll untested businesses is sparking controversy again, this time over a $6 billion program to create nonprofit competitors to commercial health insurers.

Darrell Issa, the California Republican who heads the House Oversight Committee, says five of 24 health co-ops that received $2 billion in loans under the Affordable Care Act may not survive because of financial or regulatory shortcomings. Citing reviews of the companies last year by Deloitte Consulting LLP, Issa called the loans a “costly gamble of taxpayer money.”

Leaders of the co-ops, located in Maryland, New York, New Jersey, Oregon and Vermont, counter that Issa’s information is outdated and that his staff never contacted them to discuss the Deloitte reviews. The revelation of audits that hadn’t been made public will still provide ammunition in the salvo by House Republicans, who after 37 attempts to repeal all or parts of the ACA are trying to discredit the law’s programs.

“The Obamacare co-op program was bankrolled by $2 billion of taxpayer money distributed with little transparency,” says Issa in an e-mail through a spokeswoman. Some businesses selected “have been plagued with legal and financial issues.”

The co-op in New York, Freelancers Health Service Corp., was incorporated in June 2012 and hasn’t had a long enough time to organize, says Dan McGowan, its chief executive officer. The sponsoring organization, the Freelancers Union of Brooklyn, New York, won a $174 million loan to start the company.

Bad bets

‘This is an extremely lean organization and an extremely young one; way too young to come to any conclusions that seem to be being made,” McGowan says.

Obama’s management of U.S. loans to untested businesses has been a cause for Republicans, following bad bets on plug-in carmaker Fisker Automotive Inc., battery supplier A123 Systems Inc. and solar-panel maker Solyndra LLC. While U.S. officials said most of the money for the health insurance co-ops would be recouped in the event of a failure, the disclosure opens a new avenue for criticism by Republicans.

“There needs to be concern, there needs to be oversight, and they need to be provided some assistance,” says Todd Stockard, president of Valence Health Inc., a Chicago-based consulting firm that counts co-ops in Maine and New Mexico among clients. “There’s kind of been a hands-off approach; ‘here’s the money, you passed muster.’”

Reduced funding

Concerned about viability, Congress reduced funding for the loans to $3.8 billion in April 2011 and then cut off further spending in January after the Obama administration had already lent about $2 billion. In a June 4 letter obtained by Bloomberg News, Issa asked Health and Human Services Secretary Kathleen Sebelius to supply more documents about the co-ops.

The co-ops “will promote competition and increase choice in the health insurance market,” CMS, which is run by Sebelius’s agency, said in a statement. “They will be run by their customers, and are designed to provide individuals and small businesses with high-quality, affordable health-care coverage.”

The money doled included loans to help get the co-ops up and running and a larger amount of so-called solvency funds that would cover capital reserve requirements. About 84% of the money is reserved for solvency funding, according to CMS.

If a co-op’s loan is terminated before it secures a state license to operate, all of the solvency money would be returned. Nineteen of the co-ops have received licenses while one, in Vermont, has been denied, according to CMS.

New Jersey

A New Jersey co-op also run by Freelancers was found to have expenses that would grow faster than revenues, “a negative indicator of the co-op’s ability to remain financially solvent,” Issa says, citing the Deloitte documents.

Jim Martin, the CEO of the New Jersey co-op, says that its executives expect to break even in three years. Chief Financial Officer Joel Vandevusse added that a study by the consulting firm Milliman, Inc. found that the co-op would be financially viable and repay its $107 million loan.

A third Freelancers co-op in Oregon was organized by people who didn’t have experience with insurance markets, Deloitte’s review found before the co-op was awarded a $59 million loan in February 2012, according to Issa’s letter. CEO Dawn Bonder says that she hired a chief operating officer and CFO this year who have both worked for managed-care companies.

Vermont Co-op

“That, coupled with my leadership and ability to think outside the box, having not been an industry insider, positions us extremely well to do what we’re charged with doing, which is being innovative and offering consumer choice in a way commercial carriers are not able to do,” she says.

The Vermont Health Co-op was denied a license to sell insurance on May 22 after the state Department of Financial Regulation said the company relied on unrealistic assumptions about enrollment in its plans. The department also said executives had a lack of experience with insurance.

Evergreen Health Cooperative in Maryland initially failed to win approval for a loan and had to re-apply. A federal review of the first application concluded that Evergreen’s financial statements “indicate a tenuous ability to remain” solvent, according to Issa’s letter.

The company later did win a license to operate and Evergreen said it has now assembled a network of doctors, hospitals and other health providers for future customers. That Evergreen had to revise its business plan to win its $65 million loan in September 2012 indicates a rigorous vetting by federal officials, says CEO Peter Beilenson.

“We’re quite confident that we’ll be not only solvent but we’ll get our enrollment to where it needs to be, which is about 20,000 in the first year,” he says.